Wednesday, 27 February 2019

International Payment Terms

Article on International ‘Payment Terms’ 

Received a lot of queries about international payment terms. Truly speaking this subject requires in-depth knowledge. Let us see the same. Risk in descending order: -

There are basically three parts of these payment terms as under. The payment terms can be offered as single or combination.

[a] Advance
[b] L/C {Bank guarantee}
[c] Collection

Again, there are sub categories:

[a] (1) Advance

[b] L/C {Bank guarantee}
(2) At Sight
(3) Usance

[c] Collection
(4) CAD = Cash against delivery
(5) D/A = Documents against acceptance

Let us see in details. All examples are given from view point of exporter from India.

[a] Advance payment:

This is can be 100% advance or part advance and balance any other subsequent payment terms. Rest of the features are as under:

Ø  If 100% advance; this is safest mode of payment.
Ø  One need to export within one year of time.
Ø  Funds can not be kept as fixed deposit.
Ø  Funds can be return if shipment could not take place.
Ø  These funds can be returned with interest LIBOR + prevailing rate. Benefits are fund liquidation and saving banking commission of routing documents, because under 100% advance paymentdocuments can be sent directly to buyer abroad.

[b] L/C {Bank Guarantee}

Full form of L/C is Letter of Credit. Rest of features are as under:

Ø  It is issued by buyer’s bank to supplier giving an undertaking for payment against presentation of documents as prescribed in Letter of Credit.
Ø  This is Governed by ICC International Chamber of Commerce, UCPDC-600 Uniform Customs and Practice for Documentary Credit
Ø  There two types of payments under L/C namely
i.                    At sight: under this payment is affected within 5 working days. This is low risk because supplier needs to present documents exactly as per Letter of Credit. Failing which, bank’s guarantee stands null and void. However, payment is affected only if buyer accepts discrepancies in the documents. In most case it is accepted. Buyer need material, bank needs complied documents.

ii.                  Usance: in this some credit period is offered to buyer for payment. Maximum credit period as per RBI guidelines is 180 days from date of shipment. This is moderate low risk, because of credit period is given and payment will be coming in future date.

[c] Collection (No bank guarantee)

This is Governed by ICC URC-525 International Chamber of Commerce Uniform Rules for Collection. There is no bank guarantee under this. Supplier export goods, send documents through his bank to buyer’s bank. Buyer’s bank delivers goods as per suppliers’ instructions.

Again, there are two types of payment under this likewise in L/C.

i.                    CAD = Cash against delivery
There is ‘High Risk’ under this. As buyer may or may not accept the documents.

ii.                  D/A = Documents against acceptance
This highest risky. Because material is taken by buyer and he may or may not make the payment.

Therefore, for new exporters this payment is not recommended except ECGC cover is taken.  

Very Important note: Under no circumstance’s exporter should supply with Consignee as buyer. It must be buyer’s bank for the purpose of risk management.

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